What is a HELOC? – CBS News

Stubborn inflation and high interest rates are straining Americans’ budgets and adding to mounting debt. Federal Reserve Bank of New York It reported an increase in household debt of $394 billion in the fourth quarter of 2022. Total household debt now equals $16.90 trillion, $2.75 trillion more than the same period in 2019, just before the pandemic recession.

Not looking to stand pat, many are looking for a way to pay off their debt. One way homeowners can achieve this goal is by taking out a home equity line of credit (HELOC). Understanding how a HELOC works and the benefits it provides can help you decide if a HELOC value For you.

If you think you might benefit from taking out a HELOC, start exploring your options here or use the table below to check your eligibility.

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What is a HELOC?

A HELOC This is a second mortgage that enables you to cash out some of your home equity. The equity amount is the current value of your home minus the amount you owe on the mortgage. If approved, lenders usually allow you to borrow Up to 85% of your home equity. Like a credit card, a HELOC is a revolving line of credit, so you can borrow money and pay off the loan whenever you need to.

A HELOC consists of two periods:

• Drawing Duration: You can borrow as little or as much as you want during this loan period, usually lasting two to 10 years. Depending on your lender, your payments during the draw may be interest only or include only a portion of the principal.
• Repayment period. After the draw period, you enter the repayment period, where you can no longer borrow money. You will follow a repayment schedule to clear your balance at the end of the term, which is usually 20 years. Alternatively, your lender may require you to make a large “balloon payment” to pay off the balance. Before you sign one, you need to understand the terms of your HELOC, including the repayment schedule.

Remember, a HELOC is a secured mortgage that uses your home as collateral. As such, you could lose your home to foreclosure if you fall behind on your payments.

Who benefits from taking a HELOC?

A home equity line of credit is a valuable tool that can help you achieve a specific financial goal. Here’s who can benefit from taking out a HELOC:

• Borrowers who need money for big expenses. This could include a major home renovation or car repair. If you use a HELOC on home improvements that increase the value of your home, you may qualify for a tax deduction.
• Homeowners who want to combine high-interest credit cards with low-interest loans. According to recent data Federal Reserve, the average credit card interest rate is 20.40% If you have enough equity and meet the eligibility requirements, you may be able to combine High-interest credit cards with HELOCs with low APRs ranging from 7.75% to 11%.
• Parents who want to help their child pay for college. Generally speaking, you should exhaust your financing options for federal grants and student loans before looking elsewhere for funding. If you’ve done this and still need additional funds, a HELOC can offer a lower interest rate than a private student loan.

If a HELOC sounds beneficial to your situation, start exploring your options online now You can use the table below to find some local options based on your zip code.

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How do you get a HELOC?

The timeframe for obtaining a HELOC varies by lender, but the process can take anywhere from two to six weeks. Follow these steps to get a HELOC and reduce or avoid delays

• Make sure you have enough home equity: Lenders typically look for a minimum of 15% to 20% of your equity to qualify for a HELOC.
• Shop and Compare: As with other types of loans, it’s wise to compare mortgage interest rates, fees and terms from multiple lenders to find the best HELOC available. You can shop your HELOC option by clicking here.
• Collect important documents: Contact the lender and ask what documents you need to have when you apply for a HELOC. Common information you submit includes your ID, account statement, proof of income and mortgage statement. Having these documents ready to submit can help the process go efficiently. If your lender requires an appraisal, schedule an appraiser to visit your property and prepare a report.
• Fill out an application: With your documents in hand, you can quickly submit your application. After you apply, be prepared to send any additional documents your lender requests. Your lender will then underwrite your loan, meaning they’ll review your income, credit score and other qualifications to see if you qualify for a new line of credit.
• Accept and close the loan. If approved, all that’s left is to receive and sign your loan documents. You must wait through the three-day rescission period before you can start drawing on your HELOC. During this “cooling off” period, you can cancel your loan if you change your mind.

You can use the table below to start researching rates and HELOC options now

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When a HELOC is not your best option

While HELOCs come with many benefits, they are not for everyone. For example, a HELOC will be of little value to you if you don’t have enough equity to meet your goals, such as financing a home improvement project. Additionally, if you plan to sell your home in a few years, getting a HELOC may not make sense because you must pay off your HELOC before closing on the sale. Review your financial goals and consult with your accountant or financial advisor before getting a HELOC.

Bottom line

Financial experts often advise against using a HELOC to finance a vacation, wedding, or depreciating asset such as a car or boat. Likewise, be careful about what credit products you use because you shouldn’t be paying interest on money you don’t really need.

Like a line of credit, a HELOC helps control debt by allowing you to borrow money on an as-needed basis up to your credit limit. In contrast, other types of loans may allow you to approve and pay a certain amount into your account, which may be more than you need.